Congratulations! You’re growing your family. Things just got real, and there will soon be (or already is!) a whole new person to take care of for the next 18 years — and beyond. (Yep, more than 20% of millennials still live with their parents.) That means you’ve got to figure out a way to take care of that person even if you’re not around, which means you need life insurance.
Choosing a life insurance policy can be confusing. Since the underwriting and application process can take five to six weeks, we recommend buying life insurance before you have children to ensure your policy is active when you need it. But of course if your family has already expanded, there is no time like the present to your protect them.
New parents, or anyone planning to have kids in the future, should get life insurance sooner rather than later to get the best rates.
In a two-parent household, both parents need their own life insurance policies, regardless of whether they are the primary earner or have an income.
Even if you have group life insurance through your employer, it usually isn’t enough to protect your children if you die, and you need you own private policy.
When should new parents buy life insurance?
There’s no time like the present to buy life insurance. Your rates rise on average 4.5 to 9% each year you delay the application. New medical diagnoses can mean higher rates, too.
Below are some common situations in which you should get life insurance:
If you’ve recently grown your family
If your baby is already here, it’s a great time to buy life insurance. The sooner you apply, the sooner you can protect your family. If you’ve given birth very recently, it might take longer to get covered: an insurance company may opt to put your application on hold until you’re a few months out from birth. An advisor can look at your application and tell you when you’ll be able to apply.
If you are newly pregnant or plan to become pregnant soon
You can still get life insurance if you are pregnant, but there are some caveats. Pregnancy comes with weight gain and sometimes medical complications (like gestational diabetes), which can cause your premium rates to increase. Generally, the best time to shop for life insurance is before you become pregnant or in the earlier months of pregnancy.
If you’re adopting a child, having a child through a gestational carrier or surrogate, or are a non-gestational parent
If you’re adopting a child, using a surrogate, or if you are expecting a child but your partner is the one giving carrying the child and giving birth, now is a great time to apply for life insurance. The life insurance application process can take five to six weeks. It makes sense to get it started before you meet your child, to ensure they’ll be protected financially from day one.
If you plan on having a child in the next 5 to 10 years
If you plan to give birth or adopt a child in the future (even in the somewhat distant future), we suggest applying ASAP to lock in lower premiums. You should view life insurance as a financial planning tool. You wouldn’t wait until you retire to start contributing to your 401(k), and you shouldn’t wait until you have a child to get life insurance.
What kind of life insurance do new parents need?
There are two main types of life insurance: term and whole life.
Term life insurance
You purchase term life insurance for a set number of years (the term), and when that term expires, so does your coverage (though many term products allow you to convert to a whole product at the end of your term).
Whole life insurance
Whole life insurance is permanent life insurance that lasts as long as you make your premium payments and has a cash-value component. It’s 5 to 15 times more expensive than term life insurance.
Which type is best for you?
Because it’s pure insurance and so much more affordable, term life insurance is the best product for most people, including new parents.
Some people don’t like the idea that it expires, but in truth, most of us don’t need life insurance our whole lives. At some point, your kids will be grown, your mortgage will be paid off, and your retirement will be funded — no one will depend on your earned income, so there will be no reason to have life insurance.
That said, whole life can be the right choice for families with complex financial needs or lifelong dependents. A Policygenius advisor can help you talk through the pros and cons of each policy type and help you choose the right type of life insurance for your family.
How much life insurance do new parents need?
When calculating how much life insurance you need as a new parent, it’s important to think about what would happen if you or your spouse were to die today. How much would the surviving spouse need right now for mortgage or rent payments, formula, diapers, and childcare, and – down the road – how much would they need for college savings or their own retirement?
The USDA estimates the average cost of raising a child from birth to age 18 is $233,610 for families with a household income from $59,200 to $107,400. But single parents making $59,200 or more will spend $319,020 to raise a child — 36% more.
Most financial advisors say that 10 to 15 times your annual salary is a good place to start, but a tool like Policygenius’s life insurance calculator can help you find the best number for your particular situation. Prefer a personal recommendation? A Policygenius advisor can help you decide the coverage amount that makes sense for you.
What term length do new parents need?
When you’re choosing a term length, most advisors will recommend that you choose the length of your longest financial obligation. If you’ve just signed a 30-year mortgage, that means a 30-year term is probably right for you.
Just worried about covering your child’s upbringing? A 20-year term might do it. The longer the term, the higher the premium, so it’s worth it to figure out how long a term you need.
Keep in mind that your life insurance rates increase as you age, so deciding on a shorter term now with plans to re-up with a new plan later could be an expensive proposition, especially if your health puts you in a higher-premium insurance class. Again, a Policygenius advisor can help you choose the term length that makes sense for you.
Do both parents need life insurance?
Both parents do need life insurance, even if one parent makes significantly more than the other, and even if one parent doesn't work (more on that below). The domestic work that each parent provides, including childcare, would need to be covered by the surviving parent, which could cut down on their earning potential, or be outsourced, which could have a significant impact on the family’s budget.
Plus, a life insurance benefit would be a way for the surviving parent to take some time off to grieve or even move closer to family or another support network.
There are no limits to what you can spend a life insurance benefit on, and having that protection in place can mean that a life-changing tragedy doesn’t have to change everything.
It’s best for each parent to have their own life insurance policy, but sometimes it makes sense for parents to share one policy (if, for example, one parent cannot qualify for their own life insurance, a joint life insurance policy would be one way for them to get coverage).
Life insurance for stay-at-home parents
Some people assume that only the primary breadwinner needs life insurance, but parents who either don't earn an income or who aren't the primary breadwinner make important non-financial contributions to the home and should be covered. Though life insurance coverage amounts are tied to income, stay-at-home parents who don't make an income can usually get covered by their spouse's insurance company. The policy's coverage amount will be based on their spouse's policy.
Do single parents need life insurance?
Whether you’re a a single parent by choice or single parent by circumstance, life insurance is especially important. As a single parent, your child may rely solely on your income, so they’ll need financial coverage if you’re gone. A life insurance death benefit can help pay for your children’s everyday expenses, continuing education and overall financial stability if something were to happen to you.
Do new parents need to buy life insurance for their parents?
While you’re getting your financial ducks in a row as a new parent, it might make sense to talk to your own parents about life insurance. If your parents have co-signed a loan with you, provide significant financial support, or provide significant childcare, a life insurance policy can protect your family when they're gone. Alternatively, if you are supporting your parents financially, a life insurance policy can help pay for their end of life expenses. In order to buy life insurance for your parents, you’ll need their consent and cooperation, and you’ll also need to prove that you’ll suffer financially when they die. A better option is often to encourage them to purchase their own life insurance, and name you as the beneficiary.
Is group term life insurance coverage enough for new parents?
Many people assume that the life insurance coverage they have through work is enough — but it rarely is. Plus, the group coverage you may get through work is tied to your employment, which means that if you leave your job, you lose your coverage.
New parents need their own life insurance policies that they can keep no matter what happens with their careers, so their families are protected.
Should new parents buy life insurance for their children?
New parents should buy life insurance policies for themselves so that their children will be protected if something should happen to them. Your life policy is for the benefit of your children.
As for buying a policy that insures your children, we don’t recommend it. Buying life insurance for children rarely makes sense. Life insurance is intended to be income replacement, and children don’t have incomes that need to be replaced or financial dependents. Some companies market child policies as financial tools to lock-in insurability while building cash value, but the chances are good that your child will be insurable once they’re old enough to need a life insurance policy of their own, and there are much better investment vehicles than a whole life insurance policy, which offers a relatively low rate of return.
What is a child rider?
Most life insurance policies that new parents will buy for themselves have the option to add something called a child insurance rider. These are optional additions to your insurance policy that provide a small death benefit if one of your children dies.
Child insurance riders are generally priced per $1,000 or $5,000 unit of coverage and are available in amounts from $10,000 to $100,000, depending on the carrier. A $10,000 death benefit, which is enough to cover the cost of the average funeral, may cost an additional $50 for a year, for example.
One child insurance rider will cover all current and future children.
What about buying life insurance for your adopted child?
Your adopted child has the same rights as your biological child, as long as you have legal guardianship. If you have an adopted child, they are equally as eligible for a life insurance policy as your biological child would be, and would be covered by a child rider just like any biological children would be. And just like biological children, adopted children can be named beneficiaries of life insurance policies, though as long as they’re minors, we don’t recommend it (more on this below).
Who should new parents name as a beneficiary?
Most parents generally name one another as the primary beneficiary. (And in community property states, if you’re married to your co-parent, it’s the law.) However, it’s important for parents to also have a contingent beneficiary in case something should happen to them both.
We do not recommend naming a minor child as a beneficiary. Although children can be named beneficiaries, they can’t collect the death benefit if they are under the “age of majority” (18 in every state except Alabama and Nebraska, where it’s 19). If a minor child is named a beneficiary, the court will appoint a custodian, a process that can take time and keep your child and their actual guardians from accessing the funds after your death.
How can I set up a trust for my child?
We recommend speaking with a lawyer, either to set up a trust or denote a custodian for assets under the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) laws, which allow you to give an asset to a minor for use when he or she comes of age. The custodian can use those assets for qualified expenses for the benefit of the child until the child reaches that age.
This can be confusing. But because the life insurance application process can take a while, we recommend naming your spouse as the beneficiary when you apply, and then setting up your will, UGMA/UTMA accounts or trusts, and contingent beneficiaries after the policy is in place.
The bottom line
Whether you’re thinking about having children in the future, are a new parent, are recently pregnant or are in the process of adopting, the best time to get life insurance is now. A term life insurance policy between 20 to 30 years is the best option for most new parents because it secures coverage while your children depend on your income most. Both parents, regardless of whether they are the breadwinner, need life insurance coverage because stay-at-home parents provide childcare and other domestic work that a surviving working parent will need to cover if something happens.